Apple Faces Damages Trial Over E-Book Antitrust Violation

An Apple Inc. logo sits outside a new store ahead of its opening on Kurfurstendamm Street in Berlin. Photographer: Krisztian Bocsi/Bloomberg

July 10 (Bloomberg) -- Apple Inc., the world’s biggest
technology company, “played a central role” in conspiring with
five publishers to fix the prices of electronic books, and will
face a trial to set damages, a federal judge ruled.

U.S. District Judge Denise Cote, ruling in a suit brought
by the U.S. government and 33 state attorneys general, said
Apple lost the case, in part, because of statements by its
deceased founder, Steve Jobs, that government lawyers said
showed Apple was targeting e-book leader Amazon.com Inc.

The ruling means that Apple will be ordered to stop its
price-fixing conspiracy and may have to pay triple damages for
overcharging customers under the state suits. The Justice
Department isn’t seeking damages. Apple said it will appeal.

“The plaintiffs have shown that the publisher defendants
conspired with each other to eliminate retail price competition
in order to raise e-book prices, and that Apple played a central
role in facilitating and executing that conspiracy,” Cote, in
Manhattan, said in her opinion today.

While Apple said during the trial that is has about 20
percent of the e-books market, the sales are a fraction of its
overall business. The company had $156.5 billion in sales last
year, with about half that coming from the sale of iPhones.

“It’s not a material part of their business,” said Colin
Gillis, an analyst with BGC Partners LP.

Apple fell $1.99, or 0.47 percent, to $420.36 at 2:59 p.m.
today in New York.

Five Publishers

The U.S. sued Apple and five of the biggest publishers in
April 2012, claiming the maker of the iPad pushed publishers to
sign agreements letting it sell digital copies of their books
under a model that raised prices and harmed consumers. In that
so-called agency model, publishers, not retailers, set book
prices, with Apple getting 30 percent.

The intent was to force Amazon.com, the No. 1 e-book
seller, to change its pricing model. At the time, Amazon was
selling electronic versions of best-selling books for $9.99,
which was often below cost.

When Apple entered the e-book market in 2010, it reached
agreements with the five publishers to let it sell digital
copies of their books under the agency model. A so-called “most
favored nation” clause in the contracts meant that Apple could
match lower prices charged by Amazon and other e-book retailers.

Upward Shift

“Through the vehicle of the Apple agency agreements, the
prices in the nascent e-book industry shifted upward, in some
cases 50% or more for an individual title,” Cote said in her
ruling. “Virtually overnight, Apple got an attractive,
additional feature for its iPad and a guaranteed new revenue
stream, and the publisher defendants removed Amazon’s ability to
price their e-books at $9.99.”

Apple, based in Cupertino, California, was the last
defendant left in the case after the publishers avoided trial by
settling.

“Apple did not conspire to fix e-book pricing and we will
continue to fight against these false accusations,” Tom
Neumayr, an Apple spokesman, said today in a statement. “When
we introduced the iBookstore in 2010, we gave customers more
choice, injecting much needed innovation and competition into
the market, breaking Amazon’s monopolistic grip on the
publishing industry. We’ve done nothing wrong and we will appeal
the judge’s decision.”

Jobs’s Words

Cote said evidence of the conspiracy came from Jobs
himself.

“Compelling evidence of Apple’s participation in the
conspiracy came from the words uttered by Steve Jobs, Apple’s
founder, CEO, and visionary,” Cote said in the opinion. “Apple
has struggled mightily to reinterpret Jobs’s statements in a way
that will eliminate their bite. Its efforts have proven
fruitless.”

Cote cited e-mails Jobs wrote to James Murdoch at News
Corp., HarperCollins’s parent, urging the publisher to join the
others, saying Amazon’s model for selling e-books at below cost
“isn’t sustainable for long.”

Customer Pays More

“Heck, Amazon is selling these books at $9.99, and who
knows, maybe they are right and we will fail even at $12.99,”
Jobs wrote. “But we’re willing to try at the prices we’ve
proposed.”

Jobs also told his biographer, Walter Isaacson, that Amazon
“screwed it up.”

“We told the publishers, ‘We’ll go to the agency model,
where you set the price, and we get our 30 percent, and yes, the
customer pays a little more, but that’s what you want anyway,’”
Jobs said, according to the decision.

States are seeking triple damages for overcharges to
consumers, according to Connecticut Attorney General George
Jepsen’s office. Spokeswoman Jaclyn Falkowski declined to
comment on the specific amount.

“As we move into the next phase of this trial, we will
continue to aggressively seek compensation for those who have
been injured by this conspiracy,” Jepsen said.

Consumer Victory

“This result is a victory for millions of consumers who
choose to read books electronically,” Assistant U.S. Attorney
General Bill Baer said in a statement today. “Through today’s
court decision and previous settlements with five major
publishers, consumers are again benefiting from retail price
competition and paying less for their e-books.”

The ruling is likely to help consumers with claims against
Apple in class action suits claiming they were forced to pay
more for e-books than they would have had to in a competitive
market.

The ruling is a blow to Chief Executive Officer Tim Cook,
whose tenure since replacing Jobs in 2011 has been marred by
controversies, including criticism of the company’s labor
practices in China and accusations by members of Congress that
the company uses tricks to avoid paying billions of dollars in
U.S. taxes.

Decision Preview

Cote previewed her eventual decision in a court conference
before the trial in which she told lawyers for both sides her
“tentative view” that the government could show Apple
“knowingly participated in and facilitated a conspiracy to
raise prices of e-books.”

“The decision will set a road map for future antitrust
enforcement in electronic commerce,” said David Balto, a
Washington-based antitrust lawyer who represents consumer groups
and wasn’t involved in the case. “This is a signal to
corporations thinking they can beat the Justice Department.”

Because the book publishers settled with the government
before the Apple trial, the pricing model that was found to be
in violation of antitrust laws has already been phased out.

For Apple, the loss means it may face a new regime of
government oversight for sell e-books, as well as future deals
with other entertainment companies, Balto said.

“Any financial penalty is pocket change for Apple, but
this decision can have a long-term effect,” said Balto.

The trial, which Cote heard from June 3 to June 20, focused
on December 2009 and January 2010, when Apple was rushing to
sign contracts with the publishers and build an iBookstore in
time for the introduction of the iPad.

Cote heard testimony from top publishing executives and
from Eddy Cue, the senior Apple executive on the negotiations.
The government also showed Cote statements and e-mails made by
Jobs about the e-books market.

Cue, who took the stand for two days, testified that he
felt pressure to put together the iBookstore in time for Jobs’s
introduction of the iPad, because of the failing health of Jobs,
who died in October 2011.

The case is U.S. v. Apple Inc., 12-cv-02826, U.S. District
Court, Southern District of New York (Manhattan).